Monday, June 10, 2013

Financial Independence Portfolio performance

Recently I stopped getting excited about size of my portfolio, but rather aim to focus on what is can generate for me in terms of dividends.  Now it is 3% annually. The funny thing is, even if the net worth goes up, the yield  is going down.

My understanding that with the bull market and funds are chasing performance, more and more companies are pulling out from TIPS (Treasury Inflation-Protected Securities) and putting money in the stock market.

The average yield on lowly rated corporate debt, or junk bonds, recently dipped below 5 per cent to a record low that is less than US Treasury bonds yielded in 2007.

I came to realize that for the financial independence size of the nest egg is of little importance.  Difference from a retirement portfolio is that I am not going to sell it to buy annuity.  For financial independence, the nest egg should be able to generate enough money to cover expenses and compensate for the inflation.  Inflation affects not only expenses but the principal (nest egg) as well.
For example:

Share price
Yield, %
$ 100 K
$ 100 K
Royal Dutch Shell
5.00 %
$ 100 K
$ 100 K
$ 124.00
$ 100 K
$ 7.00
$ 100 K

In other words, you would need to invest 1.8 more in ExxonMobil than in Shell or Gazprom to get the same dividends. An open question is the risk estimation and its perception.

From this prospective, my current portfolio would only be able to cover about 10% of my annual expenses at the very best.  However, the principal will deteriorate at the inflation rate, then.

I am planning to invest $40 K in 2010 money annually; it would generate $1.2K a year, after taxes - $1 K a year. Unless I find a better source of income, the situation will hardly change. I would be lucky to get enough money for retirement to buy an annuity.

Why do I focus on dividend returns, rather than absolute (including stocks price appreciation)? Hope to see it through, after all. Perhaps I could find a way to reduce my living expenses one day.

Putting it in high-risk investments is not sustainable, as the word “risk” is there for a reason.

1 comment:

  1. When you list the dividends in a table like that, it shows the power of dividends! Those are some sweet numbers and if the stock price goes up, a nice bonus!